How to be rich is a simple question upon which an entire industry can be built. With so much information already available it is difficult to shed new light on this topic, but that’s exactly what researchers William R. Emmons and Bryan J. Noeth might have done. Their investigation, conducted from 1992 to 2013, was just published by the Federal Reserve Bank of St. Louis.
The research focused on asking families five questions regarding their financial management, spending and debt handling habits. The score obtained by answering the questions showed high correlation with ability to accumulate wealth.
What are the 5 questions that predict a person’s financial health?
The phrasing of questions asked the families could be found in Federal Reserve Board’s Survey of Consumer Finances but they boil down to this:
1. Did you save any money last year?
2. Did you miss any payments on any obligations in the past year?
3. Did you have a balance on your credit card after the last payment was due?
4. Including all of your assets, was more than 10 percent of the value in liquid assets?
5. Is your total debt service (principal and interest) less than 40 percent of your income?
As far as scoring goes:
1. Yes = 1; No = 0
2. Yes = 0; No = 1
3. Yes = 0; No = 1
4. Yes = 1; No = 0
5. Yes = 1; No = 0
The average score for the families participating in research was 3.01, maximum being 5. The research indicates that there is a strong correlation of 0.67 (or 67%) between the Financial Health Scorecard (or the score) and net worth.
The research divided people into age, race, and educational background categories and presented different outcomes. One that I find not so surprising is that education is not highly correlated with a person’s ability to be financially healthy. Financial health is not a synonym of rich but it is perhaps the keystone in becoming wealthy.
And now, what does the test tell about your financial health? If you didn’t score as expected, at least you know which areas of your financial management need improvement. Good luck!
The original articles released by the St. Louis Fed